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Finding a Middle Ground to Permanently Expand the CTC

The expanded Child Tax Credit constituted one of the most significant policy changes in the American Rescue Plan (ARP), passed along party lines last March. Intended to further assist families with the cost of raising children, the revamped credit reduced child poverty but also raised concerns over its budgetary cost and connection to work. With Sen. Joe Manchin (D-WV) and the White House at an impasse over the expanded credit’s future in Democrats’ Build Back Better Act, the CTC’s fate remains uncertain. This gridlock, however, can be remedied with a compromise: permanent expansion of the CTC that not only puts caregivers and their children first, but better targets the credit’s support and curbs its cost.

The CTC has traditionally been a hallmark of bipartisan success. It was established in the Balanced Budget Act of 1997 under President Bill Clinton and expanded by each president since. The ARP included a one-year expansion of the CTC and eliminated the credit’s refundability cap and phase-in, thereby increasing access among households with little or no earnings. It also boosted the size of the credit for most families to $3,000 per child (or $3,600 for children under age 6) and paid a portion of the 2021 credit monthly instead of holding the full amount until tax filing season. Prior to that, in the Tax Cuts and Jobs Act of 2017 (TCJA), Republicans had doubled the maximum credit from $1,000 to $2,000 and increased the refundable credit amount, while significantly raising the income level at which the credit phases out to $200,000 for single filers and $400,000 for married filers. The TCJA also paired expansion of the CTC with the repeal of the personal exemption and other reforms to the tax code—changes that are set to expire at the end of 2025.

To help policymakers find a path forward on permanent expansion of the CTC, the Bipartisan Policy Center has released a package of reforms that would overcome this era of overlapping, temporary changes to the credit and instead provide lasting support to American families. The proposal would increase the CTC’s value, compared to permanent law, to $2,200 per child (or $2,800 for children under age 6), better target the credit, expand access to families most in need, and retain the credit’s connection to work and the strong anti-poverty impacts of encouraging employment. It achieves this by eliminating the refundability cap and making a portion of the credit fully available regardless of income, phasing in the remainder of the credit with the first dollar of earnings, and lowering the current phase-out levels to $150,000 for single filers and $200,000 for married filers, among other recommendations, such as continuing to make the credit available on a monthly basis.

BPC’s plan is fiscally sustainable. Its 10-year price tag of approximately $800 billion is nearly half the equivalent cost of the proposed CTC reform in the Build Back Better reconciliation bill if extended for 10 years. When further paired with permanently extending the TCJA’s repeal of the exemption for child dependents, BPC’s proposal becomes even less expensive: new modeling from the American Enterprise Institute estimates a cost of $510 billion over the decade. The proposed reforms would also deliver the lion’s share of benefits to low- and moderate-income Americans, as shown in Figure 1: 73% of benefits would flow to the bottom 50% of the income distribution.

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Figure 1: Distributional Effects of BPC’s Reforms Combined with Permanent Repeal of the Personal Exemption for Child Dependents Under Age 18 in 2031

This version of a reformed CTC could bridge the Democratic divide and even find middle ground with Republicans eager to improve the credit and extend overlapping elements of the TCJA. Critically, it would do so in a way that permanently and durably expands the CTC, providing stability to families across the country and setting up our nation’s children to thrive.

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